Good afternoon, ladies and gentlemen, and welcome to the H1 2011/12 financial statement. The presentation will be followed by a question and answer session. To register a question, please press star one on your telephone. If you require operator assistance at any point, please press star zero on your telephone. I would now like to hand over to the chairperson for the meeting, Mr. Lars Rasmussen. Please begin your meeting, and I'll be standing by.
All right. Thank you. Good afternoon, and welcome to this Q2 2011-2012 conference call. I am Lars Rasmussen, CEO of Coloplast, and I'm joined by CFO Lene Skole and our IR team. As usual, Lene and I will start with a short presentation, then we open up for questions. Please turn to slide number three. I am satisfied with the results we have released today. As expected, our growth rebounded in Q2, especially due to the normalization of the growth in Europe. Russia and China continue their strong performance, and our U.S. plan is firmly on track. All in all, we ended the first six months with 6% organic growth and 7% growth in Danish kroner. We also continue to deliver satisfying gross margins as our global operations deliver on their plans presented to you at our Capital Markets Day last year.
We report a solid EBIT margin of 27% for the first six months of 2011-12, and 29% for Q2 in isolation. Today, we will update you on a number of changes approved by the board of directors this morning. We have updated our corporate strategy, and consequently, our global sales organization is reorganized, and finally, we have made changes to our capital structure. We will provide you with more details on these topics a little later in this presentation. For the full year, we continue to expect around 6% organic growth, and we expect around 8% reported growth based on current exchange rates. For the EBIT margin, we now expect to deliver around 28% in local currencies and around 29% in Danish kroner based on our current exchange rates.
Lene will provide more details on the guidance at the end of this presentation. Please turn to slide number four. Revenues were up by 6% organically and 7% in DKK, and amounted to DKK 5.3 billion. Ostomy care organic growth was satisfactory at 6%, both in the quarter and in the first half of 2011-2012. The growth was driven by good performance in most European markets, especially in the U.K. and Germany. We saw continued strong growth in Russia and China. Beginning of April, we launched a new range of ostomy accessories under the name of Brava. The range consists of new products and updates of existing products that can help people with an ostomy, reduce leakages and improve care for their skin.
In this fiscal year, the Brava range is to be rolled out in nine countries from April through July. The market for accessories is estimated to grow with 6%-8%, with an estimated market size of around DKK 1 billion. We currently have less than 10% of that market. In continence care, organic growth was 9% in the first half of 2011-2012, and 13% for the quarter. This is a very satisfying growth and partly expected as the Q1 issues in France and emerging markets normalized during the second quarter. We also continue to see satisfying growth rates in the U.S., driven by both the Self-Cath and the SpeediCath product ranges. In total, our chronic care businesses grew by 9% in the second quarter and 7% for the first half of 2011-2012.
In urology care, organic growth was 6% in the first half of 2011-2012, and 8% for Q2 in isolation. Sales of female slings continued to decline, while sales of mesh for pelvic floor repair remained satisfactory in Q2. Sales growth of penile implants increased for the third quarter in a row, we interpret this as a sign of normalization of implant procedures in the U.S. market. In our European urology business, growth picked up in Q2, driven by our endourology business. The launch of our Atlas Mini Sling in the U.S. may be impacted by the outcomes of the current FDA investigation on second-generation mini slings. The launch is still set for mid-2012, this may be delayed, depending on potential additional documentation required by the FDA. We have submitted the required data, are now awaiting FDA.
Our wound and skincare saw organic growth of -1% in the first half of 2011-2012. Plus 1% in Q2 2011-2012. In the first half of 2011-2012, our wound care business declined by 5%. It continues to be impacted by strong competition in the main European markets. We also saw reductions of stock at our Greek distributor in Q1 and price reductions in France, implemented in April last year. Both our U.S. skincare business and our contract manufacturing saw very satisfying growth in Q2. Looking at geographies, Europe grew 5% organically in the first half of 2011-2012 and 7% for Q2. This is very satisfactory. Especially Continence Care rebounded as growth in France normalized. Organic revenue growth in the Americas was 9%, both for the quarter and year-to-date.
The U.S. management is continuously executing in accordance with plan, where several Latin American markets saw declining growth rates in Q2. Revenues in the rest of the world grew 8% organically in the first six months of 2011-2012, whereas the quarterly organic growth was 12%. Japan saw low growth in Q2 due to high stock filling last year in connection with the earthquake in March 2011. China continued its growth of its strong performance in Q2, and growth in this, in the region in general, recovered from a large tender impact in Q1. Please turn to slide number five. I am very pleased to present to you some of the key elements of our updated strategy.
I will cover the organic growth part of our updated strategy. Lene will cover the impact hereof in connection to M&A activities and the capital structure. Over the past three years, we have invested in professionalizing our sales and marketing organizations, renewed our product design and innovation process, and optimized on cost throughout the organization. This has resulted in above-market growth rates and a significant margin expansion, while our sales cost to sales ratio has remained among the highest for our peers. On this basis, we have now a top professional sales organization and a very strong pipeline of new products. I am confident that we will deliver higher growth in the coming years. Going forward, we will increase our focus on growth in the emerging markets, while continuing to build on our position in developed markets.
The overall aim continues to be to deliver increasing value creation in Coloplast. We believe we can do that best by increasing our focus on growth. This updated strategy constitutes a shift in our focus. Our focus will be less on cost and more on growth. We have today reorganized our global sales organization. We are now ready to more aggressively invest in growth initiatives. That concludes my part of the presentation. Lene will now provide more details on the financials. Please turn to slide number 6.
Thank you, Lars. We are now on slide number six. Gross profit amounted to DKK 3.5 billion, equal to a gross margin of 66%. This is an improvement of 2 percentage points compared to the same period last year. The weakening of the Hungarian forint has had a positive but limited impact on the gross margin so far. Continued efficiency in the production economy, lower salary expenses from transfer of production last year, and higher absolute sales were key drivers in this positive gross margin development. The SGA to sales ratio was 35%, same level as at full year 2010-2011. The SGA in the first half of 2011-2012 included extraordinary items of almost DKK 60 million due to a settlement of an arbitration case and an extra bonus payment to all employees, both incurred in the first quarter.
We have, in the first half of 2011-12, increased our provisions for bad debt in Southern Europe by a total of DKK 32 million. The R&D- to- sales came in at 3% and below previous spend. The effects from the restructuring of the R&D organization in the second half of 2010-11 reduced the overall spend compared to last year, and the decreasing trend you have seen reflect the increased efficiency in our product development. All in all, this results in a reported EBIT margin of 27%, compared with 24% last year. Net of currency impact, the EBIT margin was also 27%. Our net profit increased by 24% to almost DKK 1 billion, corresponding to a diluted earnings per share of DKK 23.4 against DKK 18.7 in the same period last year.
CapEx amounted to DKK 144 million, corresponding to a CapEx to sales ratio of 3%, reflecting continued low spend. Free cash flow was DKK 668 million, compared with DKK 179 million in the same period last year. The increased cash flow compared with last year was due to increased earnings, working capital increasing less than in the same period last year, decrease in taxes paid, and the acquisition of Mpathy Medical Devices last year. The effects were partly offset by an increase in net loss and realized foreign exchange hedging contracts. Return on invested capital after tax was 33%, up 7 percentage points from last year. Net interest-bearing debt to EBITDA ended at 0.1 against 0.7 at the end of Q2 last year. Now please turn to slide number seven.
As a consequence of our updated strategy, we have revised our target for the capital structure. Our updated strategy focuses on organic growth opportunities, and we have identified sufficient organic growth opportunities to continue to outgrow the market. We'll continue to look at acquisitions, but they are not a prerequisite for obtaining above-market growth. If and when M&A opportunities come along, they will obviously be given the proper attention. The board of directors has decided to no longer accumulate cash to fund a major acquisition and to cancel the target of a net debt to EBITDA of 1.5-2.5. We do not aim to have excess cash on our balance sheet, but will keep liquidity contingency of minimum DKK 1 billion in cash and marketable securities.
The board has reiterated the dividend policy, stating that excess liquidity is returned to shareholders through a combination of dividend and share buyback, including a payout ratio of around 30%. As a consequence of our strong cash generation, it may become necessary to distribute extraordinary dividends in order not to accumulate excess liquidity. The first part of the 2011-2012 share buyback program of DKK 500 million was started in February, and at the end of Q2, we had bought back shares for a total of DKK 160 million. Now please turn to slide number eight. For 2011-2012, we still expect to grow around 6% organically and around 8% in Danish kroner at the current currency exchange rates. In particular, the strengthening of the U.S. dollar and the British pound sterling impact our guidance in Danish kroner.
Our growth expectations for the year assume that performance will continue to improve in our U.S. business, primarily within chronic care, and that a certain pickup of our wound care business will occur during the fiscal year. In Q1 and Q2, many markets experienced fluctuations in distributor orders, and we expect these fluctuations to continue. We expect lower growth in Q3 as the comparable quarter last year was very high. For 2011-2012, we have upward adjusted our EBIT margin guidance in constant currencies to around 28% from previously around 27%. On the basis of current exchange rates, especially the stronger British pound sterling and the weakening Hungarian forint, we at the same time raised the guidance in Danish kroner to around 29% from previously around 28%.
We continue to see some uncertainty in especially Southern Europe, with the second quarter also showing a strong EBIT margin, we now find it right to adjust the guidance. Our CapEx guidance for 2011-2012 is unchanged at around DKK 300 million, corresponding to 3% of sales. Our effective tax rate is also unchanged at 25%-26%. In connection with the update of the strategy, the board has revisited our long-term ambition. It continues to be our ambition to outgrow the market and to deliver margins in line with the best-performing medical device companies. We believe that this is still ambitious, as not many companies who are also enjoying market leadership have been able to consistently outgrow the market and at the same time be among the top performers when it comes to profitability.
We're looking forward to providing you with more detail and information on our updated strategy at our Capital Markets Day in London on June thirteenth. This concludes our presentation. Thank you very much. Operator, we're now ready to take questions.
Thank you. Ladies and gentlemen, if you have any questions, please press star one on your telephone. To cancel your question, please press the hash or pound key. Once again, that's star one to register a question and the hash or pound key to cancel. Our first question comes from the line of Ian Douglas-Pennant. Please go ahead and announce your company.
Hi, it's Ian Douglas-Pennant here at UBS. Just a couple of questions. Firstly, on your R&D spend, that was, I think a bit ahead of market expectations there. Sorry, a lower number, as it were. Can you talk about whether that was, that's the kind of level we can look to going forward, or is there some kind of one-off maybe that helped you there? Secondly, I wonder whether you could just talk about in a bit more detail about how the turnaround of the U.S. business is going. I know that's generated some interest over the past few months. Thanks.
Okay. The R&D spend, you cannot exactly expect a level like this. I think the most interesting thing here is that we think that we have a very, very strong pipeline of new products on the way that we will launch over the next 24 months. That is also what we are building the revised strategy on that we communicated today. The level of R&D spend will variate from one quarter to the next, because we are buying quite a bit of our of the things that we're doing outside of the company, you cannot take this level for granted.
We have lowered the level inside of Coloplast due to a program we ran last year, which is called Lean and Agile. It's not the same as we're not committed to invest whatever it takes to have the right pipeline of new products going forward. On the U.S. business, it's we are satisfied with the progress of our U.S. business.
It is now almost a year ago, we changed the organization or the management team in the U.S. We are in double-digit territory when it comes to growth, which we are quite satisfied with.
Thanks very much.
Our next question comes from the line of Klaus Madsen. Please go ahead and announce your company.
Yes, hello, it's Klaus Madsen from Handelsbanken. My first question relates to the very nice rebound we see in Europe and in continents. Could you comment more specifically on how much is France contributing the normalization of the situation in France, contributing in this quarter? If I remember correctly, you estimated it had roughly a 1% negative impact in the first quarter of this year. Is it fair to assume that there's a similar 1 percentage point swing back in this quarter? On your growth strategy, you mentioned you have identified sufficient organic growth opportunities to drive above market growth.
Could you comment, maybe on some of the key initiatives here, or, perhaps point to whether this, to a significant degree, includes expansion into, adjacent or related areas to your current businesses? Those are the key questions.
Okay. When it comes to France, it's correct that we specifically mentioned that we saw lower purchase in the first quarter from our distributors. We also claimed that we could see on what we call the CS figures, that they were selling as they normally would do. We have seen a normalization of that, so they have gone back to a normal level. We also had what was the convenient due problem in the first quarter, where we are no longer allowed to sell the urine sheaths and the bags at the same point in time. Therefore, they had been split. We saw a reaction to that.
That have all been normalized. I'd also like to add that the U.K. have also had a very, very nice performance in this quarter in Continence Care and the same goes for the U.S. It's not just France that have normalized. It is actually a very strong quarter when it comes to the Continence Care business. With respect to our growth strategy or the revised strategy that we came out with, where we are shifting focus from the cost side to more growth.
The most important thing here is that we, that we actually had a strategy, if you go three years back, where we were very clear on the fact that we wanted to grow our chronic care business in Europe, and we wanted to do that as almost as number one, priority number one, two, and three. We, of course, did a lot with all the other markets. What we say now is, we think it's very important that we grow all over the place. Going forward, we are going to grow quite significantly in Europe, but we are going to put even more emphasis on growing in the U.S. and growing in China and Russia and so on and so forth.
That's what we have organized for, so that we're able to handle all the extra investments that we are interested in doing. The adjacencies, well, when we think about adjacencies, we think mostly about accessories, which I just briefly talked about when I was introducing today, and also bowel management. There's no doubt that bowel management is, for the time being, more an investment case in Europe than outside of Europe, where accessories is launched across the board, but first and foremost in Europe, and then the other countries will follow.
Right. You mentioned, I think in a, in a Reuters interview, that you are willing to invest or ready to invest up to DKK 1 billion in your, organic growth strategy here. How should we interpret that figure? If you could be more specific on that.
I've been asked to be very, very specific on what we want to invest exactly where. What we can say at this point in time is that we are willing to invest more in growth, and we are especially willing to invest in growth outside of Europe. It will comprise all of our business areas, so they are not earmarked for either ostomy or continence care or wound care or urology.
It will be for all of the business areas that we're working on, and probably the one of the business areas that will enjoy this, the most, I would think, at least when you look at the numbers, would be wound care, because wound care in Europe is not a high growth market, but it is certainly outside of Europe. We are going to invest in all of our business areas outside of Europe. That is what we are aiming at.
Right. Then, how should we link the DKK 1 billion investment to your margin progression and your margin ambition?
Yeah, I think it's a fair question, and we had also anticipated that that would come forward. The way that you should think about it is that we do have a quite efficient company today. We are still committed to make the company even more efficient, and therefore, we think we can do this investment that we are talking about without being in a situation where you will see that our bottom line is starting to drop off.
Right. We shouldn't necessarily anticipate much expansion. Is that also a fair assumption, now that you have reached a very, very satisfactory level?
I think it's, what we're trying to say is that we are committed to be, to grow more than the market. We are committed to be, to try to get the company to be one of the most, profitable companies, best performing companies on the bottom line in the, among the peer group that we're looking at. We don't think that we have, that we're in a situation where we have, used up all of our powder. We don't believe that we are going to decline on this.
Maybe if I could just add something, and look at it from a slightly more financial point of view. You can say that we actually expect our distribution to sales ratio to remain more or less around where it is. We have, of course, over the past years, also been investing quite heavily, and it has been mainly investment in professionalizing the sales force and programs, and a lot of standardization or you can always almost say, preparations for actual investments in growth. There is room to do that.
At the same time, we also expect that our admin to sale will be able to at least, you know, to cope with a bit more so that any additions you need there in order to grow more can be within the ratio that we already see. In a sense, to cut it very, very short, you can say that the operating leverage we have, then that should be enough to both fund this additional investment and to make sure that we remain within the top performers when it comes to profitability.
Right. Thank you very much.
Our next question comes from the line of Yi-Dan Wang. Please go ahead and announce your company.
Sorry, this is Yi-dan Wang from Deutsche Bank. A few questions. First of all, on your ostomy business, if I strip out the benefits that you're getting from accessories and also the much faster growth you're experiencing in the emerging markets, then that would suggest that the rest of it is growing in line with the market. Can you comment on that, and to what extent you will be able to gain share there? The second question is on the cash requirement.
How much cash do you think you would require to support the growth, which then leads on to, you know, how much cash do you estimate could be distributed each year over and beyond the dividend payments that you have highlighted? I have two more questions, but I'll let you answer those first.
When it comes to the ostomy markets, I think it's probably a fair assumption you have. In the many European markets, we have a very, very high market share, so we are probably growing a little bit in line with the markets there. We think we can grow further going forward, and that hinges on a couple of things. One is that we, as I indicated before, have a very, very nice pipeline of new products coming out over the coming years, also in ostomy. And the second thing is that we are, of course, we have been investing quite heavily, as we also said before, in professionalizing our sales force across the globe.
You asked about how much we actually invest and how that impacts our cash requirements. As I said before, we try to say is that we do not expect this additional investment to actually deteriorate our margins. We still want to remain among the top performers. That also means that we expect that we will continue to be cash generative, just cash generating. As to what will then be left to distribute depends on, you know, it might be that we see smaller acquisitions or something in the, not least in the emerging markets. If these come along, obviously, we will invest in those, and that's impossible for me to say how much that might be and when.
We have some loans that will be, need to be repaid, and they will need to be repaid within the next year or so, the last ones in 13. That means in terms of cash distribution, I would expect that cash of course, with the caveat that that's up to the board and the general assembly to decide. I would expect that this year, we'd see something similar to what you've seen over the past years. Next year you will start seeing increase in cash paid out, and that would most likely be in terms of extraordinary dividends.
Okay. Follow up on that. Should I model then for your net debt to basically go to zero?
You should model that we.
For net debt to go to zero.
Yeah, I would model that we repay our loans.
Okay.
That we then end up with, a liquidity, of about, this, about this DKK 1 billion that I mentioned earlier. That's how I would model it.
Okay, great. Then the other two, question is, on the Hungarian forint, can you give us a sense of what size benefit you would have? When that could come through if rates remain where they are, at the moment?
I think I would rather refer you to the sensitivity of Hungarian forint that we have in the exchange, because then we model it yourself, where we say that a 10% change on an annualized basis gives us about 40 million DKK on the bottom line. You can actually see there what are the currencies that we are the rates for Hungarian forint that we are presently using.
We don't know how your inventory is going to move, right? The timing of that.
Right. If you expect that normally when you model it, you can say we normally hold our inventories for about three months, and we don't expect any major increases or decreases of inventories relative to sales.
Okay. There's about a three-month delay in whatever that might come through.
Yeah. Correct.
The last question is on the write-offs that you've done on your receivables in Southern Europe. How do you decide how much to write off, and how much more do you think you might need?
First of all, we haven't actually written anything off. We have made provisions for it.
Right. Sorry. Provisions.
Any actual losses. No, I just think it's important to make the distinction.
It is, it is. Apologies for that.
Yeah. Of course, one always hopes that somehow you'd recover it. What we do is that we, you know, in every quarter, we obviously take a look at what does this look like, and we base it on the aging. We look at individual customers, and then we provide for what we believe is correct. The reason that you see, we have now provided, two quarters in a row is also that we have seen an underlying aging, that when we have looked at that, and the individual customers has told us that it was right to make an additional provision. Of course, because you would think now, what happened? I don't know. You don't know.
I don't think anybody knows, but I would say there is still a lot of uncertainty in Southern Europe, and I don't think anyone would disagree with that.
Okay. Would it be sensible for me just to assume that there will be DKK 15 million-DKK 20 million of provisions each quarter until visibility improves so much?
I wouldn't even want to guide you on that because we have done what we believe is right now, so we are covered now. It would depend entirely on what your view would be on Southern Europe over the next quarter or so.
Okay. Thank you very much.
Our next question comes from the line of Ingeborg Øie . Please go ahead and announce your company.
Hi, this is Ingeborg Øie at Jefferies. I have two questions, please. Firstly, on the capital structure strategy. Historically, there's always been the discussion about the wound business and that scale is important to this business, and you stated that you were looking for acquisitions. Should we take this as a sign that there aren't really any good acquisitions to be had, and that it is a strategy which will have to be organic, therefore? Or if you could just provide a bit of color on how you think about that business? Second question is a bit related to what Yi-Dan was just asking, and it's about what we've seen the distributors, particularly in Southern Europe, being squeezed and bearing the brunt of what's been the say, austerity measures there.
I was just wondering if you could give a bit of an update on the financial status of your main distributors and whether they are experiencing this financial distress. Thank you.
Right. If we start with the capital structure, and I'm sure Lars will also chip in on this one, but if we start with the capital structure, then it is correct that up until now, we have said specifically that we want to, you know, accumulate some firing power for acquisitions. I think you should read two things into our updated strategy and our capital structure. First of all, the very positive thing that we actually believe we can continue to outgrow the market without making acquisitions, which I see as a very positive. This is not the same as saying that we don't want to make acquisitions. There is still a scale issue in our wound care. We would still want to do acquisitions if the right thing comes along.
As we are in a situation where we can now see, we can actually do a lot without, as you can also see, there's a limited number of targets which we have already said in the market, we do not believe that we can continue to just accumulate cash for that. That is not right. We do believe that there is a lot of a good organic growth story in our wound care, not least, in emerging markets. I don't know if you have anything to add to that, Lars?
In other words.
Yeah.
Are M&A off the agenda?
No, we're not.
No, they are not. We can create a lot of value by growing organically-
Yeah.
with a bit higher rate. If there are possibilities to do an M&A, we are, of course, very interested, and then we'll have to debt finance.
With regards to... By the way, then, the capital structure that we are doing, of course, is also one that, as you can see, gives us a lot of flexibility.
Mm-hmm.
To fund via debt, if that should happen. With regards to distributor in Southern Europe, I am in no doubt that some of them are being squeezed. I mean, we all know that there was a haircut on Greek bonds, I'm sure also our distributor in Greece is also being squeezed. A lot of them are being squeezed, and we have seen, as I mentioned before, an aging of the outstandings. We haven't seen any losses. We also see that governments are actually allocating for, you know, the hospitals, the official buyer or the national buyers, they are allocating funds... to take some of the old debt out.
We don't know yet how much of that we will be able to get and reduce our old debt, but at least there is a focus on it. We're certainly not out of the woods. There is a risk in Southern Europe. I mean, nothing a lot worse than last time, sort of more or less at the same level.
Great. That's very helpful color. Just one follow-up, if I may, in terms of the strategy to grow wound in emerging markets. Is this through distributors, or are you thinking about going direct? I'm just thinking back to your strategy of focusing your direct efforts in few select markets and how you expect to do this. Maybe you could comment a bit on how the pipeline is looking in wound care, and if that is a key part of the more optimistic view on your ability to grow, outgrow the market, maybe.
I think it's, if you, if you got the impression that the investments that we are doing in emerging markets are only for wound care, then we should correct that because it's for all of our business areas, but also for wound care. It's, I think it's fair to say that the market for wound care is also interesting outside of Europe. If you take our current business, for example, China is growing very rapidly, also on wound care. The same goes for a number of the other geographies that we are in outside of Europe. That was how you should understand that comment on it.
We do not have a very large pipeline of new products, but we do have new products that we are launching when it comes to wound care. We do see this business area as being a business area where the expansion of our sales force and the higher market pressure is more important than just bringing new products to the market, because we actually have a product portfolio which we consider to be quite competitive.
Great, thank you. Sorry, I focused on that business because it's probably where there's the biggest swing factor. I do appreciate that you're having great growth in the other businesses in emerging markets. Thank you.
The next question comes from the line of Jesper Breitenstein. Please go ahead and announce your company.
Yeah, hi, it's Jesper Breitenstein from Carnegie. I have three questions, two on the capital structure and one on the new growth initiative. First, on the capital structure, can you give us some of your thinking behind the new level, why you decided on a net cash position of DKK 1 billion and not a net debt position of DKK 1 billion, for example? The second question of the capital structure is, if we should see this as a long-term capital structure, meaning if you go out and do an acquisition of, let's say, DKK 2 billion or DKK 3 billion, will you have to work your way back to the DKK 1 billion cash mark again, before distributing cash, or could you, in such a situation, live with a net debt position?
On the on the growth initiative, can you say anything on how aggressive you will be with the DKK 1 billion investment over the next five year? Will it be most in the beginning, or would you take it gradually, what to expect the return to be on the new investment? Do you expect to see a immediate effect on growth from those investments?
Thank you, Jesper, for those questions. I just start with the capital structure, I think I will just give you a little bit of our thinking behind why we chose this one. This is not a way of saying that we are now afraid of having debt. Certainly not. We can definitely live with the net debt position, I actually still think that provided one has the right investment opportunities and can invest in the business, then I think we both believe that the net debt to EBITDA 1.5-2.5 is definitely something a business like ours could live with. The thinking behind this is that at the moment, we don't see the possibility of actually investing all of the cash we have in the business.
We don't see any immediate acquisitions. Therefore, what we have tried to achieve is that we said: Well, there is no reason to take up debt with the sole purpose of sending it to the investors. We would rather, in that situation, repay debt, keep as much flexibility as we at all can in case we need it. That's the thinking behind actually have DKK 1 billion in cash, because as you can see, then our facilities, our loan, they run out shortly. That will then be the financial buffer that we have before taking up debt. I know that you wanna, and everyone else, can calculate that, we could increase earnings per share and others by taking up more debt.
We've just felt that having this flexibility, being that we don't actually have the investments there, is the right thing for us to do. Whether that's the remaining capital structure, so that if we do make an acquisition where we take up some debt, then I'm sure we can live with having net debt. We've had debt, and we can certainly live with debt again. You should not necessarily see us then saying: "Okay, then we will really not pay out anything until we have repaid the debt." That's not at all the intention. This is the capital structure that works now for that period when we don't have any major acquisitions and don't have any business needs for taking debt. I hope that clarified, otherwise, please.
Well, more or less, I'm not sure I understand why you have to go to a net cash of DKK 1 billion instead of just staying at the, what was it, DKK 377 of net debt by the end of the quarter?
It is, this is because the loans actually do run out. Yes, of course, we could I mean, the alternative would have said, let's then go out and we negotiate a facility so that we have that liquidity buffer in terms of a facility with our bank. That's certainly also a way of doing it. We have just felt that if we do that, and then we actually need it, then it probably isn't the right one to have anyways, and we would have to negotiate a new one. Therefore, we felt why not just keep that buffer on our balance sheet, and therefore become net positive. The impact, even if you calculate it theoretically, is really very, very small.
I do acknowledge, of course, that there are different ways of doing it. This is the way that we have chosen, that we believe is, gives us the most flexibility.
When it comes to the growth investments, it's of course, you can always burn the cash. What is very important here is that this is going to be investments in expansion of our sales force, for example. It's going to be investments in expanding into countries where we are not present today. It will be both with own sales force, it will also be through distributors, in some cases. Therefore, it is going to be gradually, because we need, first and foremost, a management in place that we then invest in, and then we build it from there.
The consequence of this is that we have changed the way that we are organized today, so that we are able to step up the management further in those areas. Thereby, we are also able to, over time, carry a higher investment in those areas. It's not something where we just today ready to press the button, and then we can send the money into this investment. It is something that we have to build. It is, you could say, an expansion of what we have been building over the last years.
I think your ambition has been for a long time to outgrow the market.
Yes.
Are these new initiative, steps taken just to fulfill that ambition, because you realized that something had to be done in order to continue to outgrow the market?
We take these initiatives to be able to grow more than we are growing currently. We are changing completely the emphasis or the focus in our business from the bottom line to the top line. We have to do that by organizing ourselves in a way where we are able to start investing in areas where we have not been investing that much up until now. As I explained before, we have invested primarily in Europe, in our chronic care business over the last years. This means that we're going to invest in all of our business areas, also outside of Europe. It is a step change in the way that we invest to get more growth.
Okay, thank you very much. Very helpful.
Our next question comes from the line of Hans Mähler. Please go ahead and announce your company.
Hi, this is Hans Mähler with DNB. First, to follow up on the bad debt discussion. How has the situation in Southern Europe developed over the past three months, if we try to measure the number of accounts where you actually require cash payments? Also, my second question is more a modeling issue here. If you look on your margin progress, you should see a pretty steep increase in margins during the second half. Should we expect that the same distribution of the increase, should it look like last year, meaning that Q4 will deliver the bulk of it, even if it necessarily doesn't have sort of the higher volumes? That's my two questions. Thank you.
Right. With regards to the bad debt, your question was, how much has changed over this third or the second quarter in particular.
Yeah, if I think in combination with last quarter, we discussed accounts where you actually require cash-
Yes
... payment before delivery. Just to get a sense of what's happened over the past three months, the number of accounts where you actually require that, how has that changed over that period?
I mean, the number of accounts where we actually require cash payment hasn't changed to any significant degree. What has happened over the past three months has really been that the debt that was already old has become older. We've seen an aging of the debt. That's also, of course, the reason behind why we took the additional provision.
Yesterday's situation hasn't really become any worse during that period?
Except that when, you know, when debt ages, it is worse. There hasn't been sort of more accounts where you need to go to cash payment, if that's your question. Yeah, then your question, if I've answered that, your question on margin, could you please also, margin increase, could you just say that again?
Yeah, I just wonder if you look on the second half, if you look in your guidance, we should expect quite a significant increase in margin. Should we expect the bulk of that improvement to come in the fourth quarter as we saw in the last fiscal, or will it be more evenly distributed?
I'm not sure that we should see actually an improvement, and that's why I'm a little bit confused, and I might be misunderstanding, your question.
I-
% now, and we would adjust to 28%. That is an improvement, and I think you should see that in light of the fact that in particular, in Q1, we had a one-off of DKK 65 million. Underlying, we should more or less just maintain as where we are
Okay. I don't know if you understand me correctly. I just wonder if, in terms of the actual underlying improvement, if it will be more significant in Q4 compared to Q3, looking on the second half of your fiscal?
Nah.
We take it up.
Not so that I can say anything with certainty, that's for sure.
Okay, thanks for that.
Yeah.
Our next question comes from the line of Scott Bardo. Please go ahead, and state your company.
Thanks very much for taking my questions. Scott Bardo from Berenberg Bank. would like to explore a little bit more, if possible, without jumping the gun ahead of your Capital Markets Day, your growth initiatives that you mentioned. I'm very encouraged that you're looking to step up investments to expand growth opportunities externally. I must admit, I'm sort of a little confused at this stage how one considers expanding into say, emerging countries that you mentioned, which typically are lower margin for the med tech industry, and make quite meaningful investments in doing so. You mentioned some billion Danish kroner and still deliver margin expansion.
I appreciate you're probably going to go into some detail here at the Capital Markets Day, but perhaps if you can just conceptually help me there, whether, you know, some of this is going to be, a large chunk of this is going to be capitalized or so, then I would appreciate that. That's the first question. Second question is, in terms of R&D. Now, I appreciate, you've had various initiatives, to improve your efficiencies in R&D. We've seen the ratio for R&D come down 150 basis points, quarter year-over-year, and now at the lowest level we've seen, I think, historically for Coloplast at a time you're delivering all-time high margin.
I, uh, the question really is one of, you know, with your growth initiative, do you see this sort of R&D ratio as being sustainable? You talk about higher efficiencies, and please just help me understand how they're coming through. My understanding is that some of the products that have been launched, for instance, the Biatain Silicone, is manufactured externally. And I'd be interested to know if that is also the case for some of the accessories that you're now launching as new products. They're two questions I'd like to focus on, if possible.
Hey, Scott, if we start with the investments. First of all, yes, we would really like to give you a bit more flavor at the Capital Markets Day on what we see as good sort of investment areas here. Just a few things. First of all, that we do not expect any of the investments to be investments that will be capitalized. I think that's important just to stress. Then with regards to your other question, margins, again, we'll get into more into detail at the Capital Markets Day, I think please bear in mind that we still expect to grow in Europe, and that growth in Europe is extremely profitable for us because we don't, you know, need to reinvest a lot more there than what we have got.
Those at least are two key things I'd like to say right now, but then I think we would really prefer just to go into more detail at our Capital Markets.
Maybe we could add to it also, Lene, that when we say invest.
Yeah.
It doesn't mean that we think about going out acquiring something for that DKK 1 billion.
Absolutely.
It is, it is organic-
Yes.
Expansion activities we are talking about and not acquisitions. That is on the side.
I-
Just to be on the safe side.
Very good clarification.
On the R&D side, I do understand your questions, and I may even pick up some concerns from what you're saying. I don't think that you should consider the R&D level we have now as sustainable, because it will fluctuate from quarter to quarter. We have become much more efficient, as I have said a couple of times, because I know it may be hard to believe. We have a very, very strong pipeline of new products coming out, which we also will be able to deliver on. Most of what we do is product development as we used to do, we are also, of course, figuring out ways where we can get on board products from third party, like, for example, the Biatain Silicone that you mentioned.
The same goes for the product that we talked about. It's not all of it that we are producing ourselves, but we also have a quite solid pipeline of self-invented products, so to speak. You should expect the R&D cost to fluctuate over the quarters. We are not in a mode where we have said we want to expand our margins. Let's cut back on everything. If you look at the distribution cost, they have remained at 28%-29% throughout the period where we have expanded our margin significantly. We have also stepped up the initiatives and all of our governance systems in order to be even sharper when it comes to delivering new products.
Thank you very much. Sorry, just one point of clarification then, and I fully understand why you choose to invest for growth initiatives. From what you're suggesting there, that whilst these two R&D ratios may fluctuate, and it is a given the sort of efficiency measures that you've identified here in your product flow, a relatively a level that should be kept at these levels. Does that include expanding R&D investments going forward? I'm just trying to understand.
Okay.
How R&D factors into your growth initiative?
Yeah, well, we would, no matter what, we will invest whatever we can in order to have the best possible product pipeline, or pipeline of new products. Whether we have flagged this new strategy or not, if you are in the business we are in, you simply need great products in the market, and therefore, we know that we have to invest in that. The only thing we've done over the last three years is really to hone that process and make it much more efficient and better than, and more market-driven than it was before.
If I could just add, with what we're seeing now. Of course, as Lars said, we would invest if it, if it's necessary. We would expect the R&D to stay, to remain around 3%-4%.
Thank you very much. Last, a more technical question, if possible. The benefits from your share buyback over the first half of this year were largely canceled out by the exercise of internal share options. Is that something that we should also expect for the second half of the year, or is this sort of nullifying effect now gone?
We know that we're going to continue the share buyback, but there is no way that we can control when the people that have got the options here, when they're actually going to exercise their options. I wouldn't know.
I understand, but there's still.
There's still options outstanding.
-to nullify that. Yeah. Okay. Thank you.
Our next question comes from the line of Veronika Dubajova. Please go ahead, announce your company.
Hi, good afternoon, Veronika Dubajova here from Goldman Sachs. Two questions, if I can? Hopefully, one pretty quick. Lene, I'm not sure if you can provide breakout for your revenue growth in terms of price, and mix, and volume for the quarter, and maybe more generally, comment on the type of pricing environment that you've seen in Europe and the U.S. The second question I had, which is a little bit more broad, relates to the competitive environment in Ostomy. Your biggest competitor here has recently seen some improvement in momentum, and I'm wondering whether you might be willing to speculate as to whether that is related to a better underlying growth environment in the market, or, maybe to market share gains, and who you see as the likely loser in that type of scenario.
It's I think that for the pricing, we probably, in this quarter, have seen a stable pricing, and well, then we do see the volumes go up. It's, we haven't seen any big movements in this quarter. I think that we actually have been pretty precise in trying to update you on whatever we know, on the reform side. On the Ostomy care momentum, it's really hard for us to comment on Convatec's movements. As you also see from what comes out of us, you should be a little bit careful just to take short-term effects into consideration.
It's more what kind of comments that they come up with for it. We have noted that they are not in negative territory anymore on the Ostomy side.
Is it fair to say that in terms of what you see on the ground, you haven't really seen an increased competitive pressure from their side?
I think that's fair to say, yes.
Okay, that's great. If I could, just one quick follow-up. In terms of the Spanish local government debt initiative, Lene, are you aware of any receivables that you might have taken a provision for already that might be covered and therefore be paid for in the coming months?
We don't know that yet.
Okay.
I simply don't have the knowledge.
Okay, that's great. Thank you very much.
Okay. I think we have to close down this conference call. It's 4:00 P.M. Thank you very much to everybody for participating and for your questions.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines.